Patent business: Roadblocks to a successful sale
Some of the potential hazards preventing a successful sale can be avoided by taking action long before the portfolio goes to market, while other roadblocks have to be dealt with in real time. Here are some examples of potential pitfalls.
Unknown encumbrances appear during the buyer’s due diligence
If the seller acquired the patents that are being sold or prosecuted them from their first filing, it is typically bound contractually to honour all prior licences to the patents. Therefore, the discovery of an unknown encumbrance during the buyer’s due diligence, particularly if it ties to entities that have major shares in the markets the patents read on, can derail the transaction.
Prior art is found that invalidates key patents
Any discoveries of prior art during a potential buyer’s diligence effort can derail a proposed acquisition. A valid prior art reference means the patented technology was not truly novel at the time the patent was granted, and therefore the patent will be found invalid in any court proceeding.
Buyers will go to great lengths to ensure that no public disclosures that would have enabled a person skilled in the art to formulate the invention were available at the time the patent was filed. If the buyer discovers such disclosures, the affected patents will have no value.
Inventors never assigned patents to first assignee
If it is found that the inventors never assigned title to the company they worked for at the time the patent was filed, then any subsequent transfers are deficient because, in principle, the inventors still have the rights to the patents. Sometimes this can be repaired if the inventors signed an invention disclosure and assignment agreement when they were hired by the first assignee (of title), and this agreement is available.
In addition the inventors may still be available to sign a new assignment agreement. This issue has to be repaired for the patent deal to close.
Chain of title is incomplete
US Patent and Trademark Office records often do not show the seller as being the current title holder, because there is no requirement under US law to record prior patent assignments. Buyers will require that this be rectified before a transaction can close.
In other jurisdictions the assignment of patents must be recorded to prevent maintenance fees from increasing, so title records outside the US may more accurate.
A government entity contributed development funds
A research and development fund backed by a government may want a share of the transaction proceeds to recoup its investment. It may further insist on information rights covering the identity of future buyers and their commercialisation efforts associated with the patents.
Both of these issues can bring a deal to a halt, and sellers should deal with such issues before going to market or work out an escrow arrangement to pay out the government interest when the deal closes.
Rights to past damages were not previously transferred
Case law has set the precedent that unless the ability to sue for past damages has been explicitly transferred in all prior assignments, the patents being sold may have no rights to past damages. This can come up in the buyer’s diligence, and if it’s not dealt with it may impair the ability to close a transaction.
Rights of first refusal
Some sellers enter into agreements to allow a third party the right of first refusal to acquire designated IP assets. This impairs the ability of the seller to market a patent/portfolio because buyers will not invest significant funds into a diligence effort if they know a third party might exercise a right of first refusal and trump their best offer.
Inventor attended meetings of a standards body
To attend meetings of a standards-setting organisation, inventors must sign an agreement that says any patents they file after the meeting that read on the standard will be available to license by third parties on a fair, reasonable and non-discriminatory basis. This can significantly affect the future value of such patents.
These are a few of the issues that can slow down the closure of a patent transaction. Once inventors are aware of them, they can take mitigation steps.
Art Monk is vice president, patent brokerage at TechInsights. He has a career spanning 35 years in high-technology business and managing patent divestment and acquisition transactions internationally. He can be contacted at: amonk@techinsights.com
